What does “Dead Cat Jumping” mean?

Note: This blog is written by an external blogger. The views and opinions expressed in this post belong solely to the author.

Although it is known for its high volatility, the crypto market has attracted huge attention from millions of traders over time. Pattern analysis and understanding market movements are some of the key skills needed to be an experienced trader. Finding clear patterns in market movements helps traders and investors choose their next move. Additionally, these patterns provide a fundamental basis for short-term investor activity.

A common phenomenon found by investors is the “dead cats jumping” pattern. The template has a simple explanation that makes it easy to understand. However, it is difficult to identify in practical scenarios.

You can read more about such different terms in our Crypto guide.

What is a dead cat bounce?

A dead cat bounce is a technical analysis price chart. It occurs in long-term downtrending assets and means a short-term rise in prices, followed by a decline to a previous low and a further decline.

Stocks, crypto, or any other asset that shows a short-term recovery during a downtrend is more accurately described as a dead cat bounce. After a significant correction or bearish move, the asset may experience a brief uptrend. The famous phrase “even a dead cat will jump if dropped a certain height” appeared for the first time.

In its early stages, a dead cat bounce can be mistaken for a reversal of a general trend. After some time, however, prices stall and the downtrend continues, breaking the earlier support levels and setting a new low. As a result, the pattern can also lead to a bull trap, where investors establish long positions in anticipation of a trend reversal that never materializes.

What does it show?

The purpose of trying to spot a dead cat bounce is to determine whether a stock or other asset that appreciates after a prolonged decline will continue to appreciate in value. For example, the decision to hold a short position may be made by a trader who has sold a particular stock and believes that the price increase is a dead cat jumping. On the other hand, a trader should cut his losses if he believes that the price movement is a long-term rally.

How to understand if a dead cat has jumped?

Although several technical and fundamental analysis techniques can help predict whether a return is short or not, it is a complex process with unreliable results. Therefore, it cannot be said for sure until the deadline is over.

A dead cat bounce can be caused by several factors, including bears closing out short positions or bulls establishing new long positions who believe the asset has already bottomed. Additionally, momentum traders are known to enter positions when they notice that an asset’s Relative Strength Index (RSI) is oversold.

As mentioned, dead cat litter is usually not discovered until after it has occurred. As a result, traders who see a pullback after a sharp decline may mistake it for a dead cat bounce as a trend reversal that indicates a long uptrend.

It can be difficult to tell whether a recent uptrend is a dead cat bounce or a market reversal. The truth is that identifying the market when it is at the bottom is not an easy task.

Curtain thoughts

A wave of relief after the market bounce may have investors thinking winter is over. However, it could just be a dead cat bounce, a short-lived bull run in a long-term bad market. Losses can result for those caught in a dead cat bounce because it is difficult and dangerous to predict market bottoms. The same applies to other technical patterns. No action should be taken until other indications have been considered. Care must be taken while taking a decision during a dead cat bounce as the real market scenario is evident only after that period.

Disclaimer: Cryptocurrency is not legal tender and is currently unregulated. Please ensure that you carry out a sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information presented in this section does not represent any investment advice or the official position of WazirX. WazirX reserves the right, at its sole discretion, to modify or amend this blog post at any time and for any reason without prior notice.